Republicans Ask Treasury to End ‘Too Big To Fail’ Process for Non-Banks

Key Senate Republicans urged the Trump administration to rethink the process for labeling firms whose failure could threaten the financial system, arguing it has led to substantial regulatory costs.

The Financial Stability Oversight Council, a panel of regulators with authority to impose additional oversight on non-bank financial companies, lacks transparency and has created “substantial new regulatory costs” for firms, 10 Republican senators said in a letter to Treasury Secretary Steve Mnuchin on Tuesday.

The lawmakers, including Tom Cotton of Arkansas and Mike Crapo, chairman of the Senate Banking Committee, said Mnuchin should review FSOC’s processes as part of a wider review of financial rules.

“You have our strong support for using all the tools available as Secretary of Treasury to end ‘Too Big To Fail’ and ensure that hard-working Americans are not responsible for any new bailouts,” the senators wrote.

Executive Order

President Donald Trump signed an executive order in February that directed Treasury to examine financial rules. As part of the review, the department plans to look at provisions implemented under the 2010 Dodd-Frank Act, which created FSOC, a Treasury spokesman said Tuesday in an emailed statement.

Treasury believes in appropriate regulation and in ensuring taxpayers aren’t at risk, the spokesman said. At the same time, the U.S. must ensure that banks can lend and provide liquidity which supports economic growth and job creation, he said.

FSOC’s role is to stamp out threats before they cause the level of carnage experienced in the 2008 financial crisis. Its members include the heads of Treasury, the Federal Reserve, the Securities and Exchange Commission and other agencies. Any change in how it identifies systemically important companies could affect insurers and asset managers — not the biggest U.S. lenders, which are automatically designated.

Getting that label can bring consequences such as stringent capital and liquidity requirements and aggressive monitoring by the Fed. That’s why insurer MetLife Inc. sued to free itself from the designation. The oversight council hasn’t designated a new firm as systemically important in recent years.

Controversial Regulator

The FSOC has been controversial, with Republican lawmakers rarely missing the chance to argue the panel lacks transparency and accountability.

Major changes to Dodd-Frank would need to be made by Congress, and likely would require some Democratic support. Some Senate Republicans have also been looking into forcing changes with just 51 votes through a process known as budget reconciliation, which requires demonstrating rules are draining the government’s checkbook. Eliminating FSOC’s ability to designate firms as too big to fail and gutting regulators’ power to intervene when U.S. banks fail are two issues that Republicans are considering for reconciliation.

House Republicans are also pushing for changes to FSOC. The Financial Services Committee, whose chairman is Representative Jeb Hensarling of Texas, published a report earlier this month that said the council’s process for designation is “arbitrary and inconsistent” and that the FSOC did not follow its own guidance. The panel held a hearing Tuesday to discuss the findings.

Mnuchin’s predecessor, Jack Lew, previously defended the council’s work. Testifying before lawmakers last year, he called FSOC’s designation authority a “critical tool” to addressing weaknesses in the financial system and said council had become more transparent.

Copyright 2020 Bloomberg.

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